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Fintech: A Revolution or a Transitory Hype? PDF

253 Pages·2022·8.479 MB·English
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Fintech To Nisreen, Danny, Ryan and Ivy Fintech A Revolution or a Transitory Hype? Imad A. Moosa Professor of Economics, Kuwait University, Kuwait Cheltenham, UK • Northampton, MA, USA © Imad A. Moosa 2022 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2022938901 This book is available electronically in the Economics subject collection http://dx.doi.org/10.4337/9781802206340 ISBN 978 1 80220 633 3 (cased) ISBN 978 1 80220 634 0 (eBook) EEP BoX Contents List of figures vi List of tables viii Preface ix Abbreviations and acronyms xi 1 Fintech: what is in a definition? 1 2 The evolution and revolution of fintech 18 3 Functions and market structure 33 4 The technology 55 5 The benefits and costs of fintech 81 6 The war on cash 105 7 Cryptocurrencies: a revolutionary innovation or a scam? 138 8 The implications of fintech for financial stability and inclusion 162 9 The regulation of fintech 176 10 The fintech hype 197 References 210 Index 227 v Figures 1.1 The frequency of Google search (Index 0–100, monthly observations) 4 1.2 The frequency of Google search (Index 0–100, annual observations) 5 2.1 Fintech evolution milestones 1830–1999 23 2.2 Fintech evolution milestones 2000–2020 24 2.3 Fintech sectoral innovations 29 2.4 Innovative market support services 30 3.1 Line of business of world’s top 50 fintech companies 42 3.2 B2B and B2C products and services 43 4.1 Technology and output in finance 55 4.2 Feed-forward ANN 60 4.3 The components of artificial intelligence 62 4.4 Regtech applications 73 4.5 Recording of a new transaction on a blockchain 75 4.6 Centralised vs. decentralised databases 76 5.1 Technology in the production function 82 5.2 Capital-deepening technology 102 6.1 Proportion of cash payments (%) 130 6.2 High scores of means of payment on 11 criteria (smiley face) 132 7.1 The dollar price of bitcoin (daily observations, 0 = 19/08/2016) 147 vi Figures vii 7.2 Index of the bitcoin price of a commodity 154 9.1 Regulatory response to fintech risks 189 9.2 Mapping of regulatory responses to fintech activities 192 Tables 1.1 The frequency of Google search (Index 0–100) 4 1.2 Selective definitions of fintech obtained from a Google search 9 1.3 Definition/description of fintech in popular media 12 1.4 Reference of definitions to fintech characteristics 15 2.1 Growth rates of Fintech start-ups 21 3.1 Examples of the activities of fintech companies 35 3.2 A brief description of the terms associated with products and services 44 4.1 AI applications 57 4.2 The use of big data 65 4.3 Examples of Regtech companies 74 4.4 Potential applications of blockchain technology 77 5.1 Challenges and benefits of fintech start-ups 85 5.2 Operational loss events relevant to fintech 96 5.3 Sources of operational risk relevant to fintech 97 7.1 Peaks and troughs in the dollar price of bitcoin 148 9.1 Examples of failed fintechs 186 10.1 Ranking of top inventions 203 10.2 Classification of claims in favour of fintech 207 viii Preface The word “fintech” (short for “financial technology”) has become a house- hold term, and not just a word that is used in academic journals. The popular media often publish stories about fintech and how emerging small firms utilise state-of-the-art technology to change the world of financial services. However, the word “fintech” means more than one thing. In one sense it refers to technology per se, the technology used by financial institutions to provide financial services. In this sense, fintech is not a new phenomenon but rather a phenomenon that goes back to the 19th century or even earlier, which means that it is better to use the full expression “financial technology”. However, the word is used more appropriately to refer to the industry, the collection of financial institutions using technology to provide financial services. In this broad sense, the industry includes already established financial institutions and the emerging firms that compete with them. In a narrow sense, “fintech” refers to emerging firms that compete with traditional financial institutions and aim to disrupt them by providing better-quality and cheaper financial services. The emergence of these firms creates regulatory problems, as they bring with them costs and benefits. This book is mainly about the fintech industry in a narrow sense. Confusion arises because (as we are going to see in Chapter 1) fintech is defined in so many ways that any definition may refer to the technology, the industry in a broad sense or the industry in a narrow sense. In Chapter 2, we look at the historical evolution of the technology used in the provision of financial services, which has led to the emergence in the 21st century of the fintech industry in a narrow sense. The question of whether fintech is an evolution or a revolution is also examined. In Chapter 3, we look at the structure of the fintech industry in both a broad and a narrow sense. The types of technology used by financial institutions are examined in Chapter 4, where it is argued that the term “financial technology” may be flawed because the same types of technology are used in other sectors of the economy. It is even argued that these technologies contribute more to human welfare when used in sectors other than finance where the contribution is simply some sort of extravaganza. Chapters 5, 8, 9 and 10 are about the fintech industry in a narrow sense, as the discussion leads to the inevitable conclusion that fintech is a transitory hype. In some cases, fintech is a source of scam—nothing exemplifies this better than the hype and scam of cryptocurrencies, which is the subject of Chapter ix

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